The Million $$$ Quest 2006

Today is the first day of my 50 year trading career, and I am really really really EXCITED. I learned so much over the last two net negative years. I was just an incompetent novice playing around so far, thinking all along that I knew something. I was throwing around 20,000 shares, 20 contracts etc without a clue as to what I was doing.

So, now that I have a clue.. I know that I am in for a LONG LONG LONG journey/quest. Thus, I need to take it easy on myself. I need to earn my right to take the markets for a ride. Thus, I will be trading 1 contract in my $5,000 day trading account. (This is not my whole account, and this isn't my swing trading account. An intelligent day trader would only keep 2x the margin in the account and this is 8x way too much). I will only add more contracts with a net gain of each +$10,000. It is a lofty goal and most likely I will still be trading 1 contract at the end of the year. But, I think it is the right thing to do. You have to respect the markets or you are just another washed up wannabe.

Now, I fully comprehend what it means when people say that the market will always be there. You have to be the one who has to be ready for the market. My sole goal for this year is to finish my year in the green. Make some money. It doesn't matter how much. That's my only goal.

This is a journal to keep myself focused on the ultimate goal, each and every single day. A place to record my daily thoughts and recollections. Yeah, I intend to trade every single day. I need to put in 250 days in this year. This is my work, my passion, umm.. and it is exhilarating.

I need to earn my way around, as well as I need to sit tight. And Jesse Livermore said it best: Men who can be both right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after an investor has grasped this that he can make big money. It is literally true that millions of dollars come easier to a trader after he knows how to trade than did a hundred dollars in his days of ignorance.

Only the Zeros Are Different: How Great Traders Go Bad
By John A. Sarkett, Developer, Option Wizard*

Like a pilot, a police officer or a trapeze artist, a professional trader knows he or she must follow the rules just to stay alive. Usually, this bracing thought is enough to focus the mind. Usually, this awareness suffices.

But, occasionally, the realization is lost.

Mistakes follow.

Losses mount.

An otherwise great trader succumbs.

A great trader goes bad.

How to avoid that tragic circumstance was the subject of a Futures Industry Association presentation in Chicago by Ray Kelly, professional trader and trading coach.

"Large traders trade more zeros than small traders, but the process is the same," Kelly says. "Both on the upside and the downside."

The catalyst for destruction, Kelly says, is most often ego.

Ego is the Ebola virus to the active trader.

There is an antidote, however â balance, humility and the ability to accept being wrong.

Can you or I become infected? Of course we can!

What can be done to protect against ego and its devastating effects?

Kelly says pay close, introspective attention to the following four areas: Self-knowledge, market knowledge, trading strategy and risk management. Answer the hard questions for yourself, before the market does. Like meditation, or exercise, attention must be paid each day for maximum effectiveness.

Self-Knowledge
First, when you come into your trading room, leave your ego entirely outside the door. Kelly defines ego as the sense of who we believe we are: A trader, a religious person, a father, a spouse, etc.

When the over-inflated ego gains the throne, rules go out the door. Egotism consumes natural and healthy caution, replacing it with an illusion of invincibility. An overdeveloped ego fells even the most successful, sometimes especially the most successful trader.

Expecting occasional failure, the trapeze artist practices with a net. He or she knows that the body is not more durable than the concrete below. The trapeze artist knows that he or she can only exist in the high-flying environment by following the rules.

Trouble is, ego is not software that can be easily re-installed in the trader psyche. It is hardware. You and I are hard-wired with ego. Ego is self-identity. Ego never wants to be ignored, left out, left behind. But, sometimes it gets out of control and becomes self-absorbed and unrealistic. Sometimes, you have to decide not to run with the crowd. But, to do so, you have to go against your wiring.

There is something in the human that wants to believe in the hero, the guru, the champion, and, for many, that belief is coupled with a desire to become that person. If you can't become the hero, it is almost as good to run with him or her â a dream come true!

Usually, you can't. You may only watch the hero from the stands or the balcony. But, in the financial markets, you have the opportunity to participate directly or partner with the prospective hero. His or her glory becomes your glory. This prospect is so appealing, so motivating, it will cause some of us to leave sense, common or otherwise, far, far behind.

Watch out!

In the 1980s, I participated in a risk arbitrage managed account program at a major brokerage firm, supposedly run by supertraders. Ascending to the hero's podium, my account executive disclosed that returns were expected to be 60 to 100 percent, but, if only mediocre returns were generated, the return might be as low as 30 percent or so.

Hundreds of trades (and commissions) later, I went through the laborious task of reconstructing the trading history and actual return of my account. It was 12 percent, exactly the money market rate of the day.

Contrast the swashbuckling image of the wanna-be trading hero with the wry and self-deprecating words of $1.5 billion Chesapeake Capital CEO and former Turtle Trader Jerry Parker (another FIA speaker), who says, "We know we don't know what we're doing."

Far from true, (he meant that we can't predict rate cuts, market movements, the future), but this kind of modesty contrasts sharply with what is said by those promising spectacular returns and is undoubtedly a better and safer way to sail the market oceans. His trading methodology is to take trend-following positions across many markets, expecting a few large gains to outweigh numerous losses.

Defining Success
While the psyche is often looking for others to admire and emulate, it is not taking the time and effort to define success for itself. This is usually too much hard work. Easier and more fun to soak up the vibes from the hero or try to be one yourself.

What is success? For speaker, Ray Kelly, it has been earning 200K to 300K each year, 40 percent returns, no drawdowns and the opportunity to spend time with his wife and children, he says.

To define your own success, you must answer these questions.
Who am I?
Why do I trade?
How do I prepare?
What are my beliefs about myself? About trading?
Am I ready to handle the pressures of trading?

Sound too easy? Have you ever actually done it? Kelly says, "Great truths unfold at the level of the student. As a student learns more, these questions become deeper and more profound."

Ray Kelly's own introspection involved working through a family background that included an alcoholic father and a very religious Catholic background. The religious background left him believing that it was evil to be rich. The instability in his home made him feel that, somehow, all the tension and insecurity was because of him. Therefore, he was not worthy of success.

These powerful subconscious beliefs limited his success, that is, until he worked through them. When he resolved his own conflicts, he was able to progress to a higher level of trading success.

Do these subconscious messages really sabotage your trading? Kelly relates the story of a trading associate. His son died in a tragic accident. Blaming himself, he started losing significant sums the very next week.

Kelly further cites a university study that indicates a high degree of unresolved guilt among prisoners. The study concludes that prisoners committed crimes so that external activity would match internal guilt, not the other way around.

"If you owned a Testarossa, you wouldn't think anything of having it checked and tuned on a regular basis," Kelly says. "Many trader egos are too big for a regular tuneup, however."

What to do? Often you do not realize that you are laboring under the weight of conflict. It shows up as poor performance or an inability to follow your rules. Losses are the inevitable by-product.

What to do? It depends on the person and the severity of the problem. The best course to take is to do introspective exercises constantly. Know the resources you need before you need them.

If you are already in the fire? Walk away. Take time off. Get counseling. Don't trade in the financial markets until your conflicts are resolved. Do not make the expensive mistake of thinking that, whatever "it" is, it will go away if you ignore it.

Other questions to ask yourself about your state of mind, according to Kelly, are:
Do others comment on my personality traits negatively?
Do I suffer extremes in emotion?
Is my body sending me a message?
Am I uncomfortable with this subject?
Do I take responsibility for my actions?

But to be a successful trader, you must go against the grain and do the heavy lifting of introspection.

Approach the Markets with Equanimity
Kelly says to incorporate a "bottlecap" mentality into your trading. "Like Laverne & Shirley on the TV sitcom at the Schott's Brewery, you put one bottlecap on after another, and then you go home and plan your excitement after work," he says. "Don't seek excitement from the markets, or, unhappily, you may find it."

Trading in some 70 of the most liquid 150 futures markets, patiently seeking break-outs, the Chesapeake system is a technical, trend-following system. The system will generate 200 trades per year, of which some six will pay for losses and generate returns, he says. Obviously, if you invest too much negative emotion in the 194 losers, you likely won't be around for the six big winners.

Market Knowledge
Market knowledge is the second major pillar you must depend on to avoid a market catastrophe.

You must ask yourself, continuously:
What affects markets?
How? How might things be changing?
When do you know you are wrong?
What are you trying to extract from the markets?

Kelly cites as a successful example trader David Druz, who runs the Tactical Asset Management Fund.

Druz defines exactly what his system does: "My trading system captures the capital that hedgers use to defend positions." He has back tested and quantified it, and so he knows and expects that his system will generate 30 percent drawdowns. But, over time, he has achieved excellent results because he is focused, he understands his markets, he has good money management rules and he looks to a realistic time horizon within which he plans his trading.

Part of market knowledge is defining how much you expect to make in the markets. If you're a typical newcomer, you may be looking to double your money. There is, for example, a popular phrase in options trading: "percent to double" (i.e., the percent your underlying must move to generate a doubling of your options price). For a pro like Jerry Parker, CEO of Chesapeake Capital, the answer is much more modest. His goal: 2 percent per month.

Trading Strategy
Third, develop your trading system. For Chesapeake Capital, the system is rule-based, trend-following, diversified, no bias short or long.

"This flies in the face of what clients want: Graduates of fancy schools, huge research, an intuitive approach that knows what's going to happen before it happens (e.g., be overweight in the stock market before an interest rate cut)," Parker says. "But, obviously you can't know what's going to happen before it happens, and maybe the rate cut is the start of a major trend, and maybe it's o.k. to get in after. That's our approach."

Kelly also advises traders to develop a trading system that they can actually follow. A system that is geared to their own personality and financial means. Kelly says, "If you have abstract ideas of what you want and how you are going to accomplish it, that is what you will get, an abstract result."

Test your system, he says.
What are the characteristics of the system?
Is it consistent?
Do you understand why it works?
Does it work in all markets?
Does it fit your personality?

Then, attend to business: Do your homework every night. Your competitors do. Determine your answers the night before the market.

Risk Management
Fourth, and most importantly, you must manage risk. No matter how great your knowledge of yourself and the markets is or how sound your system is, if you don't manage risk, you won't last.

Kelly says the successful, long-term trader must answer:
How much risk per trade?
(Various traders risk .05 to 5 percent of capital per trade. You must fit this figure to your system.)
Do I understand my risk?
Is my system discretionary or systematic?
(A systematic approach takes all signals generated by a trading system. A discretionary system does not mean haphazard trading but, rather, allows the trader to make exceptions to what he or she buys or sells within the framework of the signals generated.)
Where are my stops, what is the meaning of my stops?
Quantify risk. Two words that separate the world of success and the world of failure.

Losses are expected. You are not a bad trader if you experience them. Options broker Jerry Kopf, Benjamin & Jerold, Chicago, puts it this way, "It's okay to be wrong. It's not okay to stay wrong."

Kelly makes a distinction between what some people call "drawdowns" and what he calls "losses" A "drawdown" is a loss taken within a defined strategy. It is part of the strategy.

If you do not have a strategy, it is a loss. People misname the loss in the hope of avoiding the pain and to deceive themselves. A drawdown is not a personal statement about you; it is an expected part of the business plan.

Unwilling to take a small loss? For those involved in the spectacular blow-ups of recent times, small losses no longer were acceptable, so they were forced to accept disastrous losses. Keep losses predetermined and small. At best, professional traders are right 50 percent of the time or less, so they must take only small losses. A few large losses would put them out of business, and the goal is to stay in business.

"Money management is crucial," Kelly says. "This is why the exchanges have revolving doors â for those who don't master this critical skill."

Kelly notes that, when losing, amateurs increase bet size, but professionals decrease size. Don't try to catch up on one trade. If your system is sound, it will make money over time. You will recapture losses over time. And, that's okay. Because you are looking for 2 percent a month, correct? Not a fast double play.

Two Last Questions: The Bottom Line
Am I profitable?â¦
â¦Andâ¦
â¦Am I as profitable as I could be at my full potential?

If not, you must discover the reasons and make changes.

Ray Kelly repeated one message over and over at the presentation: "If you want to keep getting what you are getting, keep doing what you are doing."

Like the pilot, policeman or trapeze artist, you respect the rules of the game, you respect the boundaries, you respect how hard the concrete is, and how soft you are, and so you survive. The alternative is too costly in every way.

What is that saying? You should aim for the stars to fall on top of a tree or something.. Aiming high.. real high.

lol... No. Its really a 5 year goal, before I turn 30.

More...

OK. But, as I understand it, goals should be measurable, achievable and have a reasonable timeline or deadline. Anything short of that is wishful thinking.

The problem with aiming too high too soon is that it will likely lead to disappointment and possibly even cause you to become erratic as you realize that your results are nowhere near your expectations.

My guess is that you would be better served with more modest, intermediate goals along the way to those stars you refer to. In other words, why not break down your 5-year goal into monthly or quarterly goals against which you can measure your ongoing performance and progress? And make those goals attainable so that you can feel a sense of accomplishment along the way which will motivate you to do better, rather than having an unrealistic and unrealizable goal that will just leave you depressed.

It's fine to want to reach for the stars. But they are not going anywhere anytime soon. So let's take the time to focus on climbing that molehill first, shall we?

I have a horrible habit of taking trades that are a little out of my trading plan range. I need to stick with my trading plan. I need to overcome my desire to be in a trading at all times. I should stand aside. Do not pick bottoms, tops etc. Stay with the meat of the move, and trade the plan. I can do a lot better job of executing my plan.

I also need to get in a journal entry here a little earlier, and I need to put in a journal entry everyday.